Business Page – June 18, 2000

Corporate
Governance – Part 2

Today we
continue our discussion on the highly topical issue of corporate
governance i.e. the system by which companies are directed and
controlled. This definition puts the directors of the company at the
centre of any discussion on corporate governance. There can be little
doubt that the single overriding objective of any company is the
enhancement in the longer term of their shareholders’ investment. In
order to do this a company will develop relationships to secure its
success. Accordingly it will want to ensure that its relationships with
suppliers, employees, customers, the government and the public are
grounded on mutually beneficial terms.

It is the
duty of the directors to approve appropriate policies and to monitor the
performance of management in implementing them. As appointees of the
shareholders directors are accountable to them but are simultaneously
responsible for relationships with stakeholders.

It is
therefore incumbent on every company that it is led by directors of the
right calibre, bringing openness, thoroughness and objectivity to bear
on their roles. Within this general principle the following apply:

The
Board should be effective in leading and controlling the company.

The
decision to combine the two key tasks in any company – the running
of the Board and the executive responsibility for managing the
business – should be publicly explained and justified.

The
Board should include a balance of executive and non-executive
directors (including independent non-executive such that no
individual or small group of individuals can dominate the Board’s
decision taking).

The
Board should be supplied in a timely fashion with relevant
information to enable them to carry out their functions.

While in
law the Board is unitary and there is no legal distinction between the
executive and non-executive directors the courts have looked at the
relative involvement of these groups in matters which have come before
them. If the executive directors are the heart of the company then the
non-executive are the soul and in that regard have considerable
responsibility to oversee the management and prevent abuse.

They are
seen as having a very important role to play in corporate governance and
their independence is therefore critical. They owe their duty and
loyalty to the shareholders and not to their fellow directors. Complete
independence in a small society is difficult to achieve but every effort
has to be taken to prevent their independence from being tainted by
social, familial or business relationships with any executive directors.

Companies
should ensure that the terms of non-executive directors are reasonably
well secured by the Articles. For example all the non-executive
directors should not come up for re-election any more often than their
executive counterparts.

In
carrying out these rather onerous tasks Boards are strongly recommended
and under Stock Exchange rules are required to appoint three committees
one of which – the Audit Committee we looked at last week. Today we
look at the Nominations Committee and the Compensation or Remuneration
Committee.

Nominations Committee

Best
practice recommends that there should be a formal and transparent
process for the appointment of new directors to the Board.

This
should include a Nominations Committee made up of members of the Board.
Where however the Board is small the company may consider the functions
of the Nomination Committee a job for the whole Board. In that case the
Board should sit as the Nominations Committee rather than as the Board
when it addresses matters concerned with nominations.

The
majority of the members of the Nominations Committee should be
non-executive directors.

The duties
of the Nominations Committee should include the regular review of the
structure, size and composition of the Board; identifying and nominating
candidates to fill vacancies on the Board as they arise; make
recommendations to the Board on the continuation or termination of the
service of any executive or non-executive director.

In
recognition of their duty to the shareholders, the Chairman of the
Nominations Committee should attend shareholders’ meeting prepared to
respond to questions on the activities of the Committee.

Appointments to the Board

Increasingly,
shareholders are looking for evidence that the compensation paid to the
senior executives of public companies is linked, directly or indirectly
to creating real shareholder value. In Guyana of course this difficulty
is compounded by companiesrefusal
to disclose remuneration other than fees paid to directors. They have
narrowly and wrongly in my view interpreted the provisions of the
Companies Act and ignored the provisions in respect of service contracts
which require shareholders’ approval.

In the
circumstances of such corporate lawlessness it seems almost futile to
speak of best practice. Here again we get the “competitors excuse”
– we will not disclose since our competitor is not doing so. There can
of course be a hardly weaker excuse.

The
Compensation Committee has the overriding objective of balancing the
need to promote shareholder interests while avoiding demotivating
effects of compensation packages that do not encourage and reward good
results.

The size
of the committee varies: three to five members is typical. Many
compensation committees find it valuable for members to have diverse,
complementary backgrounds and broad business knowledge. The committee
should be made up of non-executive directors who are and independent of
management and free from any relationship which could interfere with
their independent judgment.

Although
the Chairman of the company may be appointed to the Committee, he or she
should not be the Chairman of the Committee.

The duties
of the Committee include:

Setting
the broad policy for the remuneration of the Chief Executive, the
Chairman of the company and such other members of the executive
management it is designated to consider. The remuneration of the
non-executive directors should be a matter for the Board excluding the
non-executive directors.

Determining
targets for any performance related pay schemes in the company or group
and the total remuneration of each executive manager including where
appropriate bonuses, incentive payments and share options; vetting and
authorising the reimbursement of any claims for expenses from the Chief
Executive and Chairman of the company; ensuring that the provisions
regarding disclosure of remuneration as required by the law and other
rules are complied with; producing an annual report of the Committee for
inclusion in the Annual Report of the company and ensuring that the
Chairman of the Committee attends the AGM to respond to any questions
about directors’ remuneration.

General authority of
Committees

Each
committee of the Board is authorised by the Board to seek any
information it requires from any employee of the company in order to
perform its duties.

The
committees have an implied authority to obtain any outside legal or
other professional advice and if they consider it necessary to obtain
reliable, up-to-date information relevant to any matters which comes
before them. They may also meet with the company’s professional
advisors including auditors, attorneys and financial advisors.

Next
week we will close this series by looking at a reasonable balance
between corporate prosperity and accountability.